Capital markets basics for the CFA

Published on August 31, 2020   17 min
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Hello and welcome to our talk on Capital Markets Basics. I'm Professor Michael McDonald, and today I'd like to talk to you about the basic fundamentals you need to understand when it comes to the capital markets, especially if you're going to be taking the CFA exam. Let's get started. Now one of the key areas that you'll
need to be familiar with the CFA exam is the securities markets as a whole. You'll certainly need to understand areas like the equities market, the fixed income markets, commodities markets, currencies markets, and derivatives markets, including options and to a lesser extent, warrants. Each of these different markets has distinct features and characteristics that make them unique. Each of them plays a major role in helping to finance different aspects of the overall economy.
Now within the markets as a whole, there are three different types. First, we have what we call a direct market. This is a market where the buyer and seller contact one another directly. For instance, if you think about things like commercial real estate as an example, sometimes there's a broker involved, but many times you see for sale by owner signs or for rent by owner signs, things like that. That would be an example of a direct market. Another example of a direct market would be when you see people selling used goods through eBay or through garage sales, tag sales, flea markets, things like that. Those are all examples of direct markets. What happens more often though in large and more formalized markets is that we have what's called either a broker market or a dealer market. A broker market features a broker that facilitates a transaction bringing the buyer and the seller together. Most real estate works this way. When you go to buy or sell your house, for instance, typically use a real estate broker that's going to connect buyer and seller. Then in the third type of market, we refer to as a dealer market. There's a dealer that takes ownership of a product and then resells it to a final user. Money markets, stock markets, things like that. Generally the big markets in any given country are typically either broker markets or dealer markets, or a combination of the two.